ETA Expert Insights: The Evolution of Integrated Payments
By Jake West, Director, Business Development, Vend and member, ETA Retail Technology Committee.
When looking at the evolution of payments over the past decade, it’s no stretch to say that payments & software are closer together than ever before. From payment processors acquiring ISVs, the emergence of new payment models & the combination of traditional payment resellers now actively selling POS there are a number of ways that ISVs can leverage payments as a core part of their value proposition.
I spent nearly a decade selling the value of integrated payments, starting in 2007 at Mercury Payment Systems. One of my favorite stories when thinking about the sheer change in the space dates back to 2009 when visiting an ISV in Dallas, TX. During my typical pitch on the integrated payments & partner model we built, the prospect raised a question around “PCI security” and how payment processors should be on the lookout for protecting cardholder data. The term “PCI” was new to me and not widely known in the payments industry at that time. It was the good old days of a clear-text MSR reader, and payment integrations were a breeze. Fast forward 10 years, if you’re an ISV working with a payment processor, the first topic of discussion should be focused on protecting everyone in the value chain around PCI compliance. With payments being embedded into an ISVs solution, having a credit card breach, just isn’t an option.
Once an ISV establishes solid partnerships and working integrations with payment providers, there are often attractive commercial incentives, a notion that has been around for years. Mercury Payment Systems (now Worldpay), my former employer, built a model around providing integrated payments + a recurring revenue share model, back in 2004. The company made a huge bet – payments would move from a stand-alone terminal to an integrated solution, and the ISV could benefit from embedding integrated payments into their POS, providing merchants with streamlined business operations and the ISV would build a new stream of recurring revenue. It turns out the founders were onto something and sold the 11yr old company for nearly $2billion.
Today, every major payment company has a focus on ISV integrations and building a model around integrated payments. We all know that integrated payments mean stickier merchants for the ISV & processor and ISVs now have the opportunity to choose whether they’ll leverage payments as a revenue stream, or distribution opportunity.
The integrated payments model has evolved to the point that ISVs are now able to become payment companies themselves, offering a one-stop merchant experience. When Vantiv, now Worldpay, pioneered the Payment Facilitator model in 2011, the goal was to provide frictionless payments for the ISV (or payment platforms), enabling the ISV to control the entire merchant experience. For low-risk verticals such as education, property management & healthcare, card not present ISVs gained tremendous value from controlling the merchant’s payments experience. From near instant account boarding, controlling merchant funding, even branded merchant applications & statements, the ISV is able to control the entire merchant experience. Payment Facilitation has now taken hold in the card present POS space, with companies such as Toast, Shopify & most recently LightSpeed developing in-house payment models. Integrated payments are so tightly stitched into the fabric of these companies, that many POS providers will not allow a merchant to leverage their software if the merchant is not also using their in-house payment solution, providing a significant revenue stream for the ISV and even stronger retetion.
Contrary to the PayFac model, some ISVs, (including Vend, who I currently work for), have chosen the opposite path. Instead of monetizing payments for all of its merchants, Vend has chosen to forego the payments revenue stream, passing it on to partners by leveraging the existing payments industry for distribution. While integrated payments are tightly woven into the fabric of ISVs, an ISV can choose the “open-ecosystem” approach, allowing a payment reseller to monetize the merchant for payments while selling, or referring the ISVs solution. While integrated payments have grown over the past decade, the payment reseller market (ISOs & Agents) remains strong as well. Often times a payments reseller has a deep relationship with the end merchant, providing a local support model. There’s no doubt that relationships & working with trusted advisor benefits a merchant greatly, especially when the local agent/ISO provides valuable tools that help the merchant’s growth. This strategy also helps alleviate the rising costs of digital customer acquisition programs that many ISVs rely heaving on.
The ISV & Payment Reseller worlds are coming together. Payment Resellers have evolved from selling upfront expensive systems to a recurring revenue model based on SaaS and Cloud-based technology. Now, more than ever, payment resellers understand that in this ultra-competitive world, selling on rates is truly a “race to the bottom” and a commodity-based value proposition. When bundling in POS + integrated payments, the Reseller is now providing value to a merchant that will help them win more often and keep an existing one from churning. Bundling integrated POS & Value-added services often also introduces a new revenue stream to the Payments Reseller – Subscription revenue from the POS provider. With Payment Resellers now bundling in solutions for their end merchant, an ISV can focus on partnering with this community, rather than competing with it, and providing vertically oriented software for the ISV to carry in their solution set.
The evolution of payments is real. Integrated payment processing is a decade old, ISVs are now focused on how do they leverage payments to grow. The correct answer will vary by industry and business – but it’s important, as merchants already think of the solutions as integrated.